Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) is a play that covers multiple bases. That makes Ericsson stock one of the best 5G plays. And that’s saying something.
Investors who want in on the 5G action have several different angles to pick from. If you’re expecting consumers to snap up 5G smartphones, Apple (NASDAQ:AAPL) is on the verge of releasing its first 5G iPhones. You could go with a carrier that’s busily building out its 5G network. Or, you could choose the companies that sell the technology for that infrastructure.
The Swedish networking company is a global leader in 5G infrastructure. It also has an extensive 5G patent portfolio that means it will collect royalties of $5 per handset from smartphone manufacturers.
Ericsson is one of the top three global suppliers of 5G networking infrastructure. The company competes against Nokia (NYSE:NOK) and China’s Huawei for the top spot. Currently, Ericsson claims 93 commercial 5G agreements — of those, the company says 50 are publicly announced 5G deals, while 40 of its 5G networks are live in 22 countries.
With Huawei’s 5G business reportedly in “grave danger” as U.S. bans and sanctions take effect, Nokia and Ericsson stand to gain.
Q2 Earnings and Ericsson Stock
Ericsson reported its second-quarter earnings for 2020 on July 17. There had been concern that the impact of the novel coronavirus pandemic would be felt at this point.
Some telecom companies have responded to the pandemic by cutting or delaying spending. Even if there wasn’t a deliberate reduction of expenses, there was also the potential for lockdowns to slow the deployment of infrastructure.
However, investors received good news in the report: “The Covid-19 pandemic had a limited impact on operating income and cash flow in the quarter… While the effects of Covid-19 create uncertainties, with current visibility we maintain the full-year targets for the Group.”
Ericsson reported sales for the quarter were flat (up 1% year-over-year), but margins improved and net income was up 40% YoY.
Ericsson stock popped on the Q2 news, and within days it closed at $11.81, its 2020 high.
Bottom Line on Ericsson Stock
There is no doubt that the success of Ericsson for the foreseeable future will be directly related to its 5G technology. However, while it hasn’t stopped ERIC from posting a 30% gain so far this year, the coronavirus pandemic has added a high degree of uncertainty to the equation.
On the plus side, Ericsson is one of the top three 5G infrastructure vendors globally — and one of its competitors is a Chinese giant that’s unwelcome in many countries.
In addition, Ericsson’s 5G patent portfolio will pay off in the form of smartphone royalties. The more consumers that upgrade their smartphones to take advantage of the new cellular technology, the more money flows into Ericsson’s coffers.
However, the next few years will likely be challenging. The odds of a pandemic-triggered global recession are high, and that wouldn’t be good news for Ericsson. In such a scenario, telecoms are likely to slow their spending on infrastructure.
In addition, consumers who face job insecurity are likely to hold onto their old smartphones and delay upgrading for 5G until the economic situation is more stable.
Reflecting this uncertainty, investment analysts have a cautious outlook on Ericsson stock. Among those tracked by CNN Business, ERIC is a consensus buy, but not by a wide margin. The 12-month price target of $12.17 has a modest 4.6% upside. The most optimistic target of $13.92, represents a slightly less than 20% gain.
Ericsson stock is a solid long-term bet on 5G, but with the coronavirus pandemic surging in the U.S. and the specter of a recession, its big gains may be done for this year.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
